2. a) The price of a non-dividend paying stock is $19 and a 6-month European call...

 

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2. a) The price of a non-dividend paying stock is $19 and a 6-month European call option with a strike of $20 is trading at $1. If the risk- free rate is 2% per annum, using put-call parity, what is the price of a 6-month put option with a strike of $20? (5%) b) An investor owns a stock at $30 that is currently trading at $30. They are concerned about short term market risk and now want to buy some 3-month at-the-money put options against their position. PUT PRICE STRIKES 31.50 30 $4.00 $3.00 $2.00 28.50 i) For the underlying stock price levels of $10, $20, $30, $40, $50 and $60 construct a payoff table and draw the pay-off diagram on expiry of the option for the investor's position in the stock, option and combined strategy using the relevant option price in the table above. (10%) 2. a) The price of a non-dividend paying stock is $19 and a 6-month European call option with a strike of $20 is trading at $1. If the risk- free rate is 2% per annum, using put-call parity, what is the price of a 6-month put option with a strike of $20? (5%) b) An investor owns a stock at $30 that is currently trading at $30. They are concerned about short term market risk and now want to buy some 3-month at-the-money put options against their position. PUT PRICE STRIKES 31.50 30 $4.00 $3.00 $2.00 28.50 i) For the underlying stock price levels of $10, $20, $30, $40, $50 and $60 construct a payoff table and draw the pay-off diagram on expiry of the option for the investor's position in the stock, option and combined strategy using the relevant option price in the table above. (10%)

Answer rating: 100% (QA)

Solution a PutCall Parity to Find Put Option Price We can use the putcall parity formula to find the price of the 6month put option with a strike of 2... View the full answer